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Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

QE is indeed working, working at the expense of slowing US growth! Apparently only Germany is benefiting from it through higher export surplus through what is called a Mundell-Fleming pass--through. A more integrated Europe at this juncture would have done the work of transferring the surplus to Europe as a whole since the pass--through benefit would not have come to Germany but for the weak periphery. Be that as it may, some growth --however slow, happening in the periphery now is strictly because of the effect of spending driven by the negative rate. It will continue to be stable so long as the US economy grows at 2% + rate even after the lift off ( which in itself is a bit iffy). Thus there are tow ways in which this game can play out: lift intensifies the pass-through, Euro reaches parity with US and the growth in the periphery continues; the US itself falls in to a quick recession as a result of the lift and in which the global systems stops supporting the pass-through. Let us hope and pray that the former happens. A more salutary situation is if the lift off itself is postponed by FED for at least a year os that US continues to support the growth of Europe albeit in a lackadaisical way with more exports for Germany and less for the periphery... What is not so salubrious in all these is the fact that US is also managing to attract more youth to that part of the world and that is taking away the essential spending power and in the process accenting the demographic distress. The long run solution there fore is more integration for Europe...

This is a bizarre piece. It assumes its conclusion-- that monetary policy cannot stimulate additional spending in core countries, and that macroprudential policy cannot affect financial stability (the basis for that seems to be the last decade and a half, when macroprudential policy didn't even try). That's just not true.

The core issue is at the beginning of the piece-- too-low inflation. The core countries, Germany in particular, refusing to let inflation rise to rebalance imbalances between core and peripheral countries seems to be at the heart of the issue. Monetary contraction that Mr. Gros proposes will only magnify this issue-- it'll lower inflation even further, which furthers the debt-deflation trap in Europe's periphery. Instead, policy needs to be focused on feeding inflation in Germany and other Northern European countries. That way, southern Europe's exports become more competitive and they can achieve a reduction in real debt without cutting nominal wages and prices, which would only exacerbate debt burdens and feed the debt-deflation trap.

Daniel, we are at the ZLB, so monetary policy is "irrelevant", but does no harm either. In your point of view its creating inbalances, but if the ECB stops buying periphery debt, then we will be at crisis.

And like Draghi and other announced we are looking into a policy aimed at moving Europe from the ZLB by creating inflation expectations. That's the true goal of expansionary monetary policies in a liquidity trap.

Negative interest are a tax on those who are frugal, in other words, those who earn more than they spend, are responsible citizens and live within their means with a view to their future. Taxing theses people for the sake of attempting to save a system that has failed will be a futile attempt to hide the horrendous mistake of central banking. Profligate spending, mal-investment over decades has created over production and slowing consumption. This outcome was predictable, it is a result of decades of lowering interest rates and massive borrowing. We have spent the future income of our children today and those responsible know it but dare not admit it.

Iain- The largest investors are the Central Banks themselves. Add to that large corporations or/and all those who borrow short and lend long, it's heaven. Rigged rates at these levels pulls income forward and vectors to those at the top. Monetary policy is far from irrelevant. It's a major source of redistribution to the top. For example, look how much money the Fed is returning to Treasury every year. Over 100b since QE began. Some of the money arguably comes from "traditional savers" I guess but we'd have to get to normal business cycles to fix that, which is not happening near term. Also, maybe you can argue those borrowing with worse credit, especially sovereigns, at low rates relative to risk exist. That condition may explain the supply, which otherwise could not and would not exist. Loss recognition or lack of it has to be influencing supply.
For policy makers, it's not a tough choice. If these central banks declare we are going to let the chips fall where they may, thus reducing the size of their balance sheets, we'd get higher rates but after much consternation. Nobody has the courage to take that risk.
So, it's the opposite. Never have so many done so much for so few. The tax is on the back end of wealth, not the front.

No, its not a tax on those who are frugal, at most is a tax on those who refuse to invest.

And can you please stop a little bit to think about your theory. Have you ever thought that in order to have debtors you also need lenders. So the debt is being lent by someone who will receive it in the future. There is no such thing has mortgaging our future, that's just very narrow thinking.

I do not know why Daniel invokes Minsky ("stability breeds instability") because there has not been any stability to maintain or begin with since this "Instability and Depression Pact". The whole euro idea/project was build on extremely flawed premises and is now beyond repair. The sooner the EU policymakers realize this, the fewer millions of young people will leave Europe and the fewer are the chances that Europe is already beyond the Point of No Return.

I would consider the possibility that the situation as described in Minsky's financial instability hypothesis has already occurred in Europe the decade prior the crisis.
The situation were we are now is in fact the outcome of past practises which let to the current high private sector leverage (especially for the households). Practises by the intermediary sector were unsupervised properly misallocated capital towards unproductive consumption.
So, indeed the last thing we need is more debt for the indepted, but on the other hand, the debt levels need to go down and the savers need to spend. It seems that the only solution to both is low and negative interest rates respectively. If only we could isolate their effect towards these two directions through targeted macroprudential policies.

It's clear that at the zero lower bound for nominal interest rates and with excess capacity, QE is just pushing on a string (except for the currency war/competitive devaluation aspect, and a very weak wealth effect).
It has always been clear that to raise EZ overall inflation while rebalancing between Germany and the debtor periphery, inflation and public investment have to rise in Germany and lower her trade surplus (austerity and debt-deflation in the periphery alone will just be self-defeating and, of course, deflationary).
Until Germany is willing to accept this, all other macroeconomic policies will remain just whistling in the wind or beggar-thy-neighbour (i.e., via overall EZ trade surpluses with rest of world due to internal and external devaluation).

Gros is right, both about the risks of further QE initiatives and the ECB's empty tool box. There is little good and a lot of harm that it can do bumping around with the tools it has in hand. It's really an institution that's ready for the scrap heap.

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In a low inflation recessionary environment, central banks should be allowed to monetize debt.

Lowering debt burdens would be stimulative and there would be no debt overhang from a monetization.

In a Eurozone scenario, the most efficient approach would be a monetization done on a per capita basis - for example a 1000 euro monetization would give 1000 euros for each euro citizen to their respective countries, to be used only to retire debt.

Such measured small monetizations could be incrementally rolled out as needed and provide a fair euro wide stimulus that would benefit all and penalize none.
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That's exactly the kind of solution that is needed. In a credit/debt oney system, where money is loaned into existence by banks, the money is created along with the repayment debt. One party can only have money as long as some other party owes outstanding debt. It is a zero sum equation where total money equals total debt. Within this equation, paying down debt requires a reduction of total money savings. Debt monetization -- essentially, adding net positive money into the equation -- enables debt reduction without simultaneous savings reduction. Debtors can pay down their debts, and savers can keep their savings rather than spend them or have them taxed and redistributed to debtors. A savings-debt imbalance is an arithmetic problem. Monetization is an arithmetic solution to an arithmetic problem.

Sadly, in all that by such a respected observer, the distinction between politically directed borrowing and spending, and that occurring by individual (and commercial) motivations is not noted. It just seems taken for granted that sovereigns borrow and spend; but do those sovereigns ever "save" and what is their "spending?" What are the objectives (stated and real) of that spending?

Mr. Gros recites:
"Easier credit conditions and lower interest rates are supposed to boost growth by stimulating investment and consumption demand."
Is that a definition of "growth;" or some undefined resultant condition?

Let's consider a clue: A very large "new" player entered upon the scene of the resultant condition labeled western capitalism. That player had (and has) a great new "machine" - people - those who would work for little immediately and defer other payment; work converting commodities into consumables; changing resulting prices everywhere. Consequently, more people elsewhere had more for less efforts (which would ordinarily have required "growth" elsewhere). Of course it was not only China (with its huge supply of deferred pay labor as credit); there were makers of Nikes, seamstresses in Bangladesh, etc., etc.

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